Support for gold will be a consistent presence through the rest of the year, says the financial services firm StoneX. It expects to see gold continue to gather strength as 2022 progresses, with its forecast suggesting that we will see the highest prices in quarter four.
Rhona O’Connell, head of market analysis for EMEA & Asia, says there are three overriding themes which will help to drive gold forwards and give it strength through the year, with simmering geopolitical tensions, a weaker US dollar and the Federal Reserve’s policy actions all positive for the yellow metal.
“The Fed’s new monetary cycle is now well-discounted (there was no knee-jerk reaction to the December dot plots, for example),” she said. “Tailwinds including geopolitical risk and persistently negative real interest rates are supportive, and there is a case also to be made for some weakening in the dollar as the ECB changes its stance and emerging markets show signs of recovery.”
O’Connell says that we may see fewer rate hikes than had been suggested by the Federal Reserve as it struggles to balance the need to protect economic recovery with a desire to drive down inflation noting, “We’ve got two extreme possibilities. One extreme is that rate hikes are aggressive and balance sheet shrinkage is aggressive, which would take yields much higher. The idea would be to squeeze inflation out of the system as far as possible. But that risks derailing the economic recovery. At the other end, the balance sheet shrinkage could be good enough in and of itself to allow the Fed further flexibility in terms of its rate hikes. And we could just have two rate hikes this year.”
Another favourable factor for gold is the fact that we will also continue to see an environment where real yields are negative, with the analyst explaining this won’t change any time soon, giving long term support for gold. “We have nominal interest rates yields in Europe and part of Eastern Europe in negative territory. As far as the U.S., real yields are negative going all the way to 20 years. Despite balance sheet runoff, tapering, and rate hikes, there is no foreseeable way that anything from two to ten-year real bond yields will move into positive territory in the near future.”
The geopolitical landscape favours gold too, with tensions increasing on the Russia and Ukraine border, and continuing disputes between China and Taiwan. This kind of unrest tends to unsettle markets, while gold conversely draws strength.
Finally, O’Connell says the firm remains bearish on the dollar, with this weakness only giving further momentum to gold prices. She cites a rising debt ceiling and a lack of clarity around economic legislation in the US as just two reasons why the dollar will remain hemmed in this year, giving gold the freedom to make gains.
With this trifecta of long-term support, there is no better time to act. Don’t delay. Buy gold now to be in the best position to capitalise in 2022.
